Delaney v. Fidelity Lease Limited
18 Tex. Sup. Ct. J. 449, 526 S.W.2d 543, 1975 Tex. LEXIS 249 (1975)
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Rule of Law:
A limited partner who participates in the control of a limited partnership's business is liable as a general partner, even if that control is exercised in their capacity as an officer of a corporate general partner. A creditor's reliance on the limited partner's personal liability is not required to impose such liability under the statute.
Facts:
- Fidelity Lease Limited, a limited partnership, was formed to lease restaurant locations.
- The partnership's sole general partner was Interlease Corporation.
- W. S. Crombie, Jr., Alan Kahn, and William D. Sanders were limited partners in Fidelity Lease Limited.
- Crombie, Kahn, and Sanders were also the sole officers, directors, and shareholders of the corporate general partner, Interlease Corporation.
- Delaney entered into an agreement to construct and lease a restaurant to Fidelity Lease Limited.
- The lease agreement identified the lessee as "Fidelity Lease, Ltd., a limited partnership acting by and through Interlease Corporation, General Partner."
- After the restaurant was built, Fidelity Lease Limited failed to take possession or pay rent, breaching the agreement.
Procedural Posture:
- Delaney sued Fidelity Lease Limited, Interlease Corporation, and all limited partners in a Texas trial court for breach of contract.
- The trial court severed the cause of action against the limited partners in their individual capacities.
- The trial court granted a take-nothing summary judgment in favor of the limited partners, finding they were not personally liable.
- Delaney, as appellant, appealed the summary judgment to the Texas Court of Civil Appeals, but only as to the three limited partners Crombie, Kahn, and Sanders, who were the appellees.
- The Court of Civil Appeals (an intermediate appellate court) affirmed the trial court's judgment.
- Delaney, as petitioner, appealed to the Supreme Court of Texas (the state's highest court) for review.
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Issue:
Does a limited partner become liable as a general partner by taking part in the control of the limited partnership's business while acting as an officer of the partnership's sole corporate general partner?
Opinions:
Majority - Justice Daniel
Yes, a limited partner who takes part in the control of the business becomes liable as a general partner, and this statutory liability cannot be evaded by acting through a corporate entity that serves as the general partner. The court reasoned that the corporate form cannot be used as a shield to circumvent the Texas Uniform Limited Partnership Act's prohibition on limited partners controlling the business. The defendants' argument that liability also requires a plaintiff's reliance on the limited partners' personal credit was rejected, as the statute's plain language only requires that the limited partner "takes part in the control of the business." Allowing limited partners to control the business through a minimally capitalized corporation would vitiate the statutory requirement that a limited partnership have at least one general partner with unlimited liability.
Analysis:
This decision is significant for preventing the use of a corporate general partner as an absolute shield for limited partners who actively manage the business. It establishes that the statutory "control" test is a functional one, looking at the reality of who exercises control rather than respecting the corporate form in all circumstances. The ruling reinforces the fundamental trade-off of limited partnerships: limited liability is granted only in exchange for non-participation in control. This holding makes it more difficult for limited partners to simultaneously enjoy limited liability and managerial authority through the use of a thinly capitalized corporate intermediary.
